Do not miss super-megamarkets that pop up in China: "Leapfrog" development where underdeveloped infrastructure paradoxically gives rise to a cutting-edge market

[Expertise]
Chinese Economy and Relations among Japan/China and the United States

A smartphone economy reflected in the taxi situation in Shanghai

For the last two or three years, I have been finding it hard to catch a cruising taxi during my business trips to Shanghai. Earlier, it was not so difficult to do so there; I have visited Shanghai on business several times a year for the past decade. Taxis provided a cheap, easy, and convenient means of transportation in the City.

In Beijing and provincial cities, by contrast, picking up a cruising taxi was traditionally rather difficult. To be on time for a meeting in these cities, it was necessary to use a subway or hire a chauffeured car. In Shanghai, however, I did not feel that necessity, because taxis were rather easy to come by back then.

The situation changed two to three years ago. One day, I found it so hard to catch a taxi that I was late for three different meetings. I decided to hire a chauffeured car to move within Shanghai thereafter.

In the meantime, the taxi situation in Beijing has become even worse. In the past, it took ten to twenty minutes to catch a taxi after a dinner meeting. Now it is not surprising if you end up failing to grab one after one-hour's try. Subways have become the only option to travel in the City after a dinner meeting. (I often have to walk around one kilometer to get to the nearest subway station in Beijing.)

Behind this change is the widening use of smartphone-based taxi-hailing services.

For the past two to three years, it has become a common practice for Chinese city dwellers at large to use a smartphone app to hail a taxi. You can flag a taxi carrying no passengers, but to little avail. Such a taxi is often heading to the customer who called via a smartphone app. So hailing a taxi without using a smartphone app has become harder than ever.

One such app that boasts a high market share in China is offered by Didi Chuxing, the Chinese version of Uber. (Uber withdrew from the Chinese market last year.) This app allows users to hail private cars and chauffeured cars as well as taxis. Yet cash settlement is not allowed for these non-taxi vehicles, making it difficult for foreign business travelers to use them.

During a period of few hours after dinner, Chinese people use this service to catch non-taxi vehicles. They pay by a Chinese credit card or via a smartphone-based settlement app, notin cash.

These means of settlement are unavailable for foreign business travelers, because they do not have a bank account in China.

The rapid growth of such ride-hailing services in the past two to three years has made it extremely difficult to catch a taxi without a smartphone in Beijing, Shanghai, and other major cities. This represents a significant improvement in convenience for Chinese people, although it may be less convenient for foreigners with a limited range of settlement methods available.

Japan lagging behind in IoT-based services

Ride-hailing apps are only part of the story. In China, the development of smartphones' settlement functionality and the uptake of e-commerce have made economic activities by all--young and old, male and female--more oriented toward the Internet of things (IoT). In fact, IoT has permeated all levels of Chinese society, as shown by the increasingly common practices below:

●Not carrying business cards (holding a smartphone against another instead to exchange information)

●Not using Internet e-mail (using SNS on a smartphone instead)

●Not carrying cash (paying by smartphone instead)

●Not using a credit card (paying by smartphone instead)

●Shopping in e-commerce even in rural areas where there are few stores (payments made by smartphone)

●Splitting the meal bill in an instant using smartphones

●Rapid spread of Mobike, a rental bicycle service that allows users to pick a bike up and drop it off at any public parking area, with payments made by smartphone only

●Offering consumer loans based on personal creditworthiness that has been assessed using the history of smartphone-based settlements.

The quick spread of such services in China is chiefly attributable to once-prevalent inconvenience in economic activities, which can be largely divided into three types.

First, landline phones were traditionally uncommon at the household level in China. This gap has been rapidly filled with the use of mobile phones by all--young and old, male and female.

Second, city suburbs and rural areas having few stores meant that shopping was inconvenient there. This gap has been filled with a dramatic shift to e-commerce, which has significantly improved the level of convenience for consumers in areas with few stores.

Third, day-to-day fund settlements were made more inconvenient in China than in Japan by financial institutions that were inconvenient, and many bogus bills that were in circulation. This gap has been filled with the rapidly widening use of convenient and secure means of settlement via a smartphone app.

In sum, the lack of landline phones has paved the way for cellphones and smartphones, the lack of convenient stores has paved the way for e-commerce, and the lack of convenient banks has paved the way for fintech.

The phenomenon in which the emergence of innovative, next-generation technology allows societies to skip transitional technology and enjoy its fruits is referred to as "leapfrog development."

An example of this is that settlement by check has not taken root in Japan, but settlement by bank transfer has.

Leapfrog by the "Dragon," as China is often called, may be rather oxymoronic, but such leapfrog may not be emulated even by Japanese businesses that boast technological prowess.

Where will the next leapfrog development occur?

The next leapfrog development in China will likely occur in the telemedicine sector.

China is seriously suffering from the shortage of medical institutions. Renowned hospitals in major cities are visited by several to tens of thousands of outpatients a day. The lobby of such a hospital looks more like the precincts of Shinjuku Station in Tokyo during rush hours--a scene unimaginable in Japanese hospitals.

As such, ordinary patients may not have access to satisfactory and substantial healthcare services. Untimely treatment may deteriorate their health conditions. Or it could even be fatal.

To rectify the situation soon, it is clearly insufficient just to build more hospitals in a steadfast manner. This is where telemedicine comes into play.

In telemedicine, medical exam data are sent to a hospital via smartphone for analysis. Doctors of the hospital properly analyze the data, and the hospital gives instructions needed for disease prevention. If a disease is suspected, the hospital conducts necessary examinations for diagnosis.

The full-fledged introduction of these telemedicine services such as prescribing and dispensing medicine through the process is expected to provide a fundamental solution to the dearth of hospitals in China.

Although telemedicine is currently prohibited by law in China like in Japan, given the poor healthcare situation at the moment, telemedicine must be introduced to the country in the near future. Such introduction, if it begins at all, will clearly give rise to leapfrog development on a scale that would be unimaginable in Japan.

Japanese firms increasingly bipolarized

Even in innovative industrial sectors for which a large market is non-existent in Japan, Japanese businesses can produce high-quality products and services that fit Chinese market needs, if they continue to work hard by taking advantage of their technological capabilities.

To that end, Japanese businesses must assimilate themselves into the Chinese domestic market to accurately assess the needs of Chinese businesses and individuals. Accurate assessment of market needs will be never done if the businesses remain in Japan, because at issue are innovative technologies that are not rooted in economic and social life in Japan.

Efforts to develop products that meet the needs of the Chinese domestic market are relevant not only to industrial sectors with good potential for leapfrog development; in fact, they are also relevant to traditional sectors such as automobiles, consumer electronics, food, and basic materials.

Chinese domestic needs are different from Japanese ones in these traditional sectors as well. This means that Japanese businesses must develop unique products that better meet China's needs and improve their production efficiency accordingly.

In the recent Chinese domestic market, some Japanese businesses continue to be successful in such sectors as automobiles, construction machinery, smartphones, liquid crystal panels, daily necessities with high added value, and e-commerce. They have something in common: accurate assessment of local needs, the development of products that fit such needs, and efforts to improve production efficiency in order to offer affordable prices for consumers.

In an era when the dragon superpower achieves leapfrog development, Japanese firms that dare not venture out of Japan cannot see business opportunities that such an era offers; they do not even know how to seize them.

By contrast, tremendous success and huge profits are in store for Japanese firms whose top executives frequently visit China to see local market needs with their own eyes for accurate assessment and take R&D and production efficiency initiatives from the frontline of the market.

Products and services that are common in Chinese industrial sectors that develop beyond Japan's technological levels will eventually enter the Japanese domestic market. It will not be until then that Japanese firms that do not dare to venture into the Chinese market will know what makes Japanese firms that did so different from them in terms of corporate capacity.

As Chinese market needs become more and more oriented toward high added value, different attitudes toward the China market are polarizing Japanese businesses more than ever.

(This article was translated from the Japanese transcript of Mr. Seguchi's column published by JBpress on June 19, 2017.)